Paying for performance Featured

7:00pm EDT February 28, 2007

For CEOs, success is predicated on the growth of the organization’s top and bottom lines. The sales force is usually accountable for the lion’s share of the required revenue increases, and they are often motivated toward the goals that are outlined in the variable compensation plan.

Although sales compensation needs to be considered a strategic endeavor, it becomes a tactical one when CEOs quickly attempt to fix the compensation structure if they find that it is not producing the desired results. So says Scott Barton, senior consultant with Watson Wyatt Worldwide. He says that there are three traditional reasons behind a CEO’s quest to find a better sales compensation structure: incentive expense is too high in relation to revenue growth; plan designs are inconsistent, fragmented or unclear across the organization; and sales management believes cash pay-out opportunities are not competitive.

“Our research shows that a number of factors define high-performing sales teams versus low-performing ones,” says Barton. “As we start to look under the hood at sales compensation, we often find a disconnect between the desired performance and the financial incentives.”

Smart Business spoke with Barton about the current trends in sales force compensation and how CEOs can align financial rewards with the company’s business strategy.

How can CEOs structure global compensation for sales?

Find the appropriate balance between global consistency and local specialization. A global structure should include a common comp philosophy and set of metrics for monitoring plan effectiveness. Local managers depend not only on competitive total pay opportunity for finding and keeping sales talent, but also a plan structure that fits with regional norms. Local attitudes toward at risk pay and tax policy are common differentiators.

Getting a handle on how each region pays its various sales roles is a huge endeavor in a fragmented, global sales organization.

Ultimately, though, the CEO needs to measure and compare the sales comp ROI from each geographic region. What matters for most companies is growth — growth in revenue, profit and acquisition of new customers.

CEOs need to understand what's limiting growth. Sometimes it's the company's best customers. Watson Wyatt research shows that salespeople in poor performing companies spend much less time acquiring new business than their high-performing counterparts. Companies with a culture for business development have an edge for growth. The energy of high-growth sales teams and cultures contrasts sharply with that of organizations engrained in account management.

By comparing key growth stats, monitoring pay and performance results and experiencing first hand the sales culture in each region, the CEO should have a good foundation for building a global sales compensation structure.

Are CEOs including a broader base of employees in variable compensation?

We are seeing a trend toward inclusion of staff not traditionally eligible for variable pay plans. Drivers include creating a performance-based culture, greater sense of urgency and teamwork. For example, operational teams and IT project managers might now have a portion of their pay tied to goals that contribute to sales productivity.

There’s also a movement toward team-based compensation that includes employees who have a direct effect on customer retention and the overall customer experience. In the past, sales and those responsible for customer satisfaction were measured and compensated separately; now, some plan elements cross over, creating greater focus, accountability and synergy.

How can CEOs align sales compensation with the company’s goals?

Make certain the salespeople can influence and are accountable for the company's goals. A common disconnect is to include in the incentive plan measures for which the reps have limited influence, such as profitability or product mix. The goal is to pay salespeople for what's important to the company. To hold back pay from otherwise productive salespeople because of poorly performing lines of business is a dead end. Effective salespeople go to where they can influence their results and income.

What’s the best way to structure a plan to drive sales force effectiveness?

Plan design should be centered on how you want the sales people to spend their time. Compensation should be directly connected to results. Quotas are the bridge. Putting sufficient pay at risk into the plan — on average about 30 percent of the target pay should be variable — helps keep employees engaged and contributes to meaningful pay-for-performance relationships.

SCOTT BARTON is a senior consultant in the Compensation Practice of Watson Wyatt Worldwide’s San Francisco office. Reach him at (415)733-4263 or scott.barton@watsonwyatt.com.